Fed’s Preferred Inflation Measure Ticks Up in December

The Federal Reserve’s preferred inflation measure heated up in December as underlying price pressures persisted.

Inflation in the 12-month personal consumption expenditures (PCE) price index rose to 2.9 percent, from 2.8 percent in November, according to new Bureau of Economic Analysis data released on Feb. 20.

Economists had forecast a reading of 2.8 percent.

Core PCE inflation, which excludes volatile energy and food categories, rose to an annual rate of 3 percent from November’s 2.8 percent.

Financial markets had expected 2.9 percent.

On a monthly basis, PCE and core PCE rose at a higher-than-expected pace of 0.4 percent.

Fed officials rely more on PCE than the consumer price index (CPI) because it is updated more frequently and reflects changes in consumer behavior.

It is also used to track the central bank’s 2 percent target and is factored into policy decisions.

Last week, the Bureau of Labor Statistics published the January CPI report. It showed that the annual inflation rate slowed sharply to 2.4 percent, below consensus estimates.

Both the PCE and CPI measurements are expected to ease in the coming months.

The 12-month PCE rates for January and February should ease to 2.6 percent and 2.4 percent, respectively, according to the Cleveland Federal Reserve. February’s annual inflation rate in the CPI could hold steady at 2.4 percent.

But while government statistics suggest inflation remains sticky, private-sector indicators point to significant disinflation in the U.S. marketplace.

The Truflation U.S. CPI inflation index—a running real-time estimate using a treasure trove of economic data—is 0.94 percent.

While government numbers lag, market watchers anticipate the monetary authorities will keep interest rate cuts on hold for some time.

“While some market participants are looking at inflation in the rear view mirror, the Fed is still signaling the safety warning that ‘objects in the mirror are closer than they appear,'” Charlie Ripley, senior investment strategist for Allianz Investment Management, said in a note emailed to The Epoch Times.

“From our perspective, the minutes support our view that rate cuts are off the table for the foreseeable future.”

In addition, personal spending and income rose 0.4 percent and 0.3 percent, respectively, in December.

Interest Rates Likely to Hold Steady

The fourth quarter’s weaker-than-expected growth rate was not enough to increase bets that the Fed will lower interest rates at next month’s meeting.

Investors are still penciling in a June rate cut, according to the CME FedWatch Tool.

The Bureau of Economic Analysis released the GDP data for the October–December period, showing the economy grew at just 1.4 percent, far below the consensus forecast of 3 percent.

Last quarter’s figure reflected the 43-day government shutdown as a contraction in government consumption expenditures.

Federal outlays plunged almost 17 percent.

It also revealed a slight pullback in consumer spending, which accounts for two-thirds of the economy.

A silver lining from the GDP report was a 3.8 percent increase in gross domestic private investment following two quarters of lackluster readings.

Before the bureau’s publication, President Donald Trump had warned that what he called the “Democrat shutdown” impacted the U.S. economy by “at least two points.”

“That’s why they are doing it, in mini form, again. No Shutdowns! Also, lower interest rates. ‘Two Late’ Powell is the worst!” the president wrote in a Feb. 20 Truth Social post.

Overall, the U.S. grew at an annualized rate of 2.2 percent.

Separate data signaled a tepid slowdown in the manufacturing and services sectors.

The S&P Global Manufacturing Purchasing Managers’ Index—a monthly survey of the industry’s prevailing economic conditions—dipped to 51.2 in February, from 52.4 in the previous month.

The services PMI also eased to 52.3, from 52.7.

Both readings came in below expectations.

“A combination of weakened demand, high prices, and adverse weather colluded to dampen business activity in February, resulting in the slowest expansion of output for 10 months,” Chris Williamson, chief business economist at S&P Global Market Intelligence, said in a report.